This news service delves into the details around the recently-reported private equity bid for US-listed Focus Financial, a firm that's made a name by aggregating scores of wealth management firms in the US and overseas. We ask what such a move might mean for the sector.
What does Focus Financial Partners’ agreement to consider selling itself to a private equity firm after little more than four years as a public company signify for the RIA business?
For starters, Clayton, Dubilier & Rice’s offer to pay a 36 per cent premium for Focus shares is widely seen as a ringing endorsement of the RIA model.
“Despite all the talk of a slowdown, it really hasn’t materialized,” said M&A veteran Peter Nesvold, partner at Republic Capital Group, who heads the merchant bank Nesvold Capital Partners. “The private markets continue to be highly enthusiastic about deploying capital into the wealth management industry.”
The buyout offer “tells us that the RIA business is so attractive that large PE firms are willing to take a bet and pay over $4 billion for a firm that trades in the public markets at $3 billion before the takeout premium,” said Daniel Sievert, chief executive of M&A specialists and investment banker ECHELON Partners.
End game for roll-ups?
Founded in 2004 by financial engineer and Austrian native Rudy Adolf, Focus pioneered the roll-up, or aggregator model that is now deployed by scores of competitors.
The move to go private is a “watershed moment” for that model, according to veteran industry analyst Alois Pirker, former research director for Aite Group's Wealth Management practice who opened his own consulting firm last month.
“The core question,” according to Pirker, “is what is the end game for roll-ups?”
Changes in the M&A market including higher valuations, increased competition and higher interest rates may have forced Focus’ hand, according to a veteran industry executive and longtime Focus rival.
“The days of cheap financing and multiple arbitrages are over; buyers can no longer take advantage of unsophisticated sellers,” the executive, who asked not to be identified, said. “Sellers are demanding more fair pricing, and the buyers are no longer in control of the market. Focus never had anything to offer other than money; now that rates are rising and the sellers are smarter, their so-called business model of 'multiple arbitrage' is over."
“What we have seen with the Focus model,” said industry consultant Tim Welsh, CEO of Nexus Strategy, “is that growth slows with the increased competition from other PE buyers and their platforms.”
Perilous public path
Focus was also one of the few advisory companies to go public, a path which proved to be disappointing.
“We were rooting for Focus stock to work because it was expected to lead to more IPOs in the area,” Nesvold said. “However, the deal seemed to be plagued from the start – the IPO was priced aggressively, then there were several years of confusion over what the true organic growth rate was, and lastly the debt issue kept reoccurring.”
Despite numerous acquisitions, Focus “has struggled to show a consistent increase in share price,” ECHELON’s Seivert noted. “In large part they have not done a great job for those who invested in the company or those that took stock as part of transactions.”
Focus’ experience does not appear to bode well for other RIAs considering going public, most notably CI Financial.
To date, the industry consensus had been that the “ultimate exit” for a private equity-backed aggregator was an IPO, said RIA executive Grant Rawdin, president of Wescott Financial Advisory Group in Philadelphia. “That’s now under question,” he said.
Focus’ share price faltered because Wall Street wasn’t impressed by Focus’ true organic growth, according to Nesvold, who also founded Nesvold Capital Partners. “That would be the key takeaway if I were advising CI on its IPO,” he said. “Make sure you have a compelling organic growth story to communicate to investors.”
Leverage is the key for CI Financial’s IPO prospects, said investment banker and consultant David Selig, CEO of Advice Dynamic Partners.
“If CI isn't overly levered at this point, a public offering
could work,” Selig said. “But if they lever up like some of their
competitors, one of which is rumored to be levered at eight times
EBITDA, the public option isn't attractive given where interest